Iceland was not to blame for its bank crisis and did no wrong when refusing to repay billions of pounds of UK savers' money, a European court said today.

Governments in Britain and the Netherlands were forced to repay £3.18 billion to members of the public who lost their deposits when Icesave, an online subsidiary of Iceland's Landsbanki, collapsed in the 2008 crisis.

The Luxembourg-based European Free Trade Association Court ruled that deposit-guarantee laws did not cover ‘a systemic bank failure of the magnitude experienced’ in the tiny North Atlantic nation.

Icesave: The collapsed savings arm of Landsbanki attracted swathes of UK savers after it offered top rates

Iceland, which has a population of just 320,000, went from economic wunderkind to financial basket case almost overnight when the credit crunch took hold.

Some 340,000 savers lost deposits when Icesave collapsed, 200,000 of which were British.

An estimated £3.18 billion was repaid by the UK and Dutch governments, and both have been trying to get their money back ever since.

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Icelandic voters have twice rejected deals brokered by their government to reimburse the two countries, partly because of anti-terrorism legislation used by the British government.

Iceland's foreign ministry said it was ‘a considerable satisfaction that Iceland’s defense has won the day’ in court.

Borrowed cash: Billions of UK depositors' money was lost when Icelandic bank Landsbanki (pictured) collapsed in 2008, and the UK government have been trying to retain the money paid out ever since

‘Icesave is now no longer a stumbling block to Iceland economic recovery,’ it said in a statement.

The country says it is nevertheless repaying Britain and the Netherlands from money it is raising by selling off the remaining assets of Landsbanki.

Icesave at the time of collapse said that 95 per cent of its customers had deposits of less than £50,000, meaning they would be covered in full by the combined Icelandic and UK deposit protection schemes.

Officials in the capital Reykjavik said that Iceland has paid IKr 585bn (£2.8bn) of the IKr 1,166bn (£5.7bn) claims from Icesave – this, it says, is the equivalent to more than 90 per cent of the minimum deposit guarantee the two governments were obliged to pay.

It added: ‘It is expected that the Icesave claims will be paid out in full by the actual debtor, the estate of the failed Landsbanki.’

The court case was brought by the European Free Trade Association Surveillance Authority, which makes sure that non EU members Iceland, Liechtenstein and Norway comply with European Union regulations.